So, is Obama’s student-loan executive order actually going to do anything to mitigate rising tuition prices?

posted at 5:01 pm on June 10, 2014 by Erika Johnsen

Noah already covered the reliable Republican-bashing optics of President Obama’s latest attempt to rope in young people with the allure of super-free stuff, but I just wanted to take a quick look at the unintended-yet-entirely-predictable consequences of the White House’s oh-so-munificent executive action that is ostensibly meant to lessen students’ debt burdens. Via WaPo:

In an attempt to further ease heavy college debt, President Obama on Monday signed an executive order allowing millions of student-loan borrowers to cap their payments at 10 percent of their monthly income.

Flanked by students and recent graduates who borrowed money to go to school, Obama said the cost of college and burden of student debt are suffocating middle-class families and putting students at an economic disadvantage before they enter the workforce. …

Most student-loan borrowers already have the option to limit payments to 10 percent of their income under recent legislation and regulations. Obama’s order on Monday extended that option to about 5 million others who were not covered by the previous changes, including those who took out loans before October 2007. …

Obama has publicly endorsed legislation sponsored by Sen. Elizabeth Warren (D-Mass.) that would allow students to refinance both public and private loans at lower interest rates. It would be paid for by closing a tax loophole available to the wealthy.

The real, most fundamental problem with crushing student loan debt is, of course, that it is so very crushing. Traditional college tuition prices have been on a continuous upswing far outstripping inflation for going on several decades now, largely helped along by the fact that the federal government has stepped in as a cheap and indiscriminate lender to anyone and everyone looking for any type of student loan.

President Obama’s executive order is a relatively small item, but it certainly isn’t going to do diddly squat to help pay down the more than $1.2 trillion debt bubble currently plaguing students, and nor is sending out the precisely wrong message to future borrowers: We’re going to make it even easier than it already is for you to take out even more and even bigger loans. How do you suppose colleges and universities will respond to that message? By, in turn, raising their prices, perhaps? And might apparently cheaper loans factor into potential students’ personal cost-benefit analyses when evaluating their education/career ideas and future prospects, perhaps tipping the scales in favor of less wise investments? Even worse than Obama’s executive order, however, is Sen. Warren’s proposed legislation, which is an even larger item that creates even more of these perverse incentives.

In the name of helping them, federal politicians, and many other people, massively oversell higher education to the detriment of students. Perhaps as much as half of people who enter college don’tfinish; a third of people with a bachelor’s degree are in jobs not requiring the credential; underemployment is even worse for graduate-degree holders, and; cheap college has almost certainly fueled credentialinflation, not major increases in knowledge or skills.

Decreasing what borrowers will repay means taxpayers – who had no choice in whether the loans were made – have to make up the difference. And there is a little matter of being nearly $18 trillion in debt already.

There is no such thing as a free lunch, or a free education at a liberal arts college for that matter — and teaching students otherwise is not doing them any favors.

Yep – the basics of supply and demand seems to have escaped this White House.

…. or maybe they understand that principle perfectly – hmmm

jake-the-goose on June 10, 2014 at 5:10 PM

Perhaps the system will work better if college costs don’t require student loans in the first place. The loans are simply guaranteed incentives for educational institutions to spend like crazy on anything but providing the best quality education that will provide the best means for employment after graduation for its students, the last priority for spending on campus, it seems.

I recall, about six-seven years ago now, getting a job with a rapidly growing company that had a number of divisions. One of those divisions, the one that pretty much funded the rest of the company, was a student loan servicing bit.

The Feds came in and issued regulations that basically drove that arm of the company out of business.

Simple solution: tie the loan conditions to the employment prospect of the student’s field of study. Graduating with a degree in chemical engineering? Generous loan conditions. Graduating with a degree in transgender architectural history? Lots of luck securing a loan.

Kills several birds with one stone. Students face the reality of the market while in school and are encouraged to get degrees in majors in which they can pay off their student loan.

Professors with BS degrees suddenly find themselves with empty classrooms and are not retained.

Barack Obama
12m
President Obama, in Tumblr session, on shootings: ‘We’re the only developed country in the world where this happens’ – @USATODAY
Read more on usatoday.com
=========================

President Obama talked about student loans and made an emotional argument about the need to address gun violence in American during a Tuesday session on the social media website Tumblr.

Some highlights:

5:07 p.m. — Over and out: “I’ve had a great time,” Obama tells Tumblr users.

5:05 p.m. — Obama says he knows one thing he’ll do after his second term is over: “I’ll be on a beach somewhere.”

But that won’t last long, he adds, saying he wants to work with young people among other things during his post-presidency.

“Guard against cynicism,” Obama tells Tumblr users.

5:00 p.m. — The topic of school shootings comes up, as a questioner says he knew the college student who went on the recent deadly shooting spree in California.

Obama says the nation has to figure out a way to keep guns out of the hands of mentally unstable people.

“We’re the only developed country in the world where this happens,” Obama says of mass shootings. “And it happens every week.”

Gun violence in America is “off the charts,” Obama says.

He notes that Australia enacted gun control laws after a single mass shooting, and hasn’t had one since.

Obama again stumps for improved background checks, but says too many lawmakers are “terrified” of the National Rifle Association. But he noted that “a fundamental shift in public opinion” is needed before Congress takes action.

While some people say mental illness is the problem, Obama said “the United States does not have a monopoly on crazy people.”

The problem is availability of guns, Obama said, and “this country has to do a lot of soul searching.”

4:51 p.m. — Another issue surfaces: A proposed increase in the minimum wage. Obama talks about the need for more vocational education, from plumbers to carpenters.

4:45 p.m. — Obama urges Tumblr voters to support a Senate Democratic plan that would, theoretically, help students lower debt loads by using new government loans — at lower interest rates — to pay off existing private loans. Republicans call the plan a gimmick, and have vowed to block it.

4:42 p.m. — Obama discusses his administration’s plans for college “scorecards,” ranking schools in various ways.

4:37 p.m. — Tumblr users are asking Obama for career advice, and what kinds of college majors they should pursue.

Obama talks up math and science, but says everybody is different, and people should pursue work “at something you care deeply about.”

4:32 p.m. — Obama stresses the need for more math and science education, while joking about the fact that he was a humanities major.

“The thing about humanities is you could kind of talk your way through classes,” Obama notes at one point.

He adds that getting a math or science education “doesn’t preclude you from writing haiku at some point.”

4:28 p.m. — Obama highlights the key part of his student debt relief program: Payments can be capped at 10% of income. He signed an executive order Monday for an expansion of that rule.

Not a lot of people know about this program, Obama says, and “I hope that the Tumblr community spreads the word.”

4:25 p.m. — Early questions focus on the rising costs of college — and one likens Obama’s proposals to help with loan repayments to “a band aid on a broken leg.”

Obama also cracks wise about the Tumblr handle of one questioner: “Haiku Moon.” It could be her real name, Obama muses, adding that “that’s a cool name.”

4:15 p.m.– We begin about 15 minutes late, and President Obama explains his reasons for doing Tumblr.

“Let’s tell another one million students that when they graduate, they will be required to pay only 10 percent of their income on student loans, and all of their debt will be forgiven after 20 years –- and forgiven after 10 years if they choose a career in public service, because in the United States of America, no one should go broke because they chose to go to college.” – President Barack Obama, January 27, 2010

A year ago, President Obama set a national goal: by 2020, America will once again have the highest proportion of college graduates in the world. But because of the high costs of college, about two-thirds of graduates take out loans with an average student debt of over $23,000. This debt is particularly burdensome for graduates who choose to enter lower-paying public service careers, suffer setbacks such as unemployment or serious illness, or fail to complete their degree.

To ensure that Americans can afford their student loan payments, the Health Care and Education Reconciliation Act gives student borrowers new choices in how they repay their loans. The initiative was developed by the Middle Class Task Force chaired by Vice President Biden, and it will expand the income-based repayment plan for federal student loans that was put in place last summer. More than 1.2 million borrowers are projected to qualify and take part in the expanded IBR program.

Under this new law, students enrolling in 2014 or later can choose to:

Limit Payments to 10 Percent of Income: Borrowers choosing the income-based repayment plan will pay no more than 10 percent of their income above a basic living allowance, reduced from 15 percent under current law. The basic living allowance varies with family size and is set at 150 percent of the poverty line, currently equaling about $16,500 for a single individual and $33,000 for a family of four.
More than 1 million borrowers would be eligible to reduce their monthly payments.
The payment will be reduced by more than $110 per month for a single borrower who earns $30,000 a year and owes $20,000 in college loans, based on 2009 figures.
Forgive Any Remaining Debt after 20 Years, or after 10 Years for Those in Public Service: Borrowers who take responsibility for their loans and make their monthly payments will see their remaining balance forgiven after 20 years of payments, reduced from 25 years in current law.
Public service workers – such as teachers, nurses, and those in military service – will see any remaining debt forgiven after 10 years.
Fully Funded by Student Loan Reforms: These new initiatives are funded by ending the current subsidies given to financial institutions that make guaranteed federal student loans. Starting July 1, all new loans will be direct loans delivered and collected by private companies under performance-based contracts with the Department of Education. According to the non-partisan Congressional Budget Office, ending these wasteful subsidies will free up nearly $68 billion for college affordability and deficit reduction over the next 11 years.

These proposals are part of the Obama-Biden Administration’s ambitious agenda to make higher education more affordable and to help more Americans earn college degrees. This agenda includes:

More than doubling funding for Pell scholarships between 2008 and 2011.
Tripling the largest college tax credit – the American Opportunity Tax Credit.
Increasing investments in America’s community colleges, Historically Black Colleges and Universities and other Minority Serving Institutions.
Simplifying the federal student aid application (FAFSA) making it easier to apply for college financial aid.

There’s quite a bit wrong with colleges and college campuses today, but one under reported aspect of tuition increases has been declines in state funding for public higher education. The old bargain used to be that the state governments would use tax money to provide most of the operating budget of a university, and as a result tuition was low since little of the actual cost fell on students. Over the last 20 years however, states have cut funding for colleges quite a lot, in some cases explicitly telling colleges to raise tuition to cover the difference.

In short, the market was already distorted by direct state funding of colleges. It was always terribly expensive to go to college, it’s that the “costs” were more hidden because the state paid so many of them directly without the student having to dip into their own pocket. Now the costs have shifted to students and are again distorted through federally backed student loans.